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Economy in Brief

OECD Metrics Show a Broad Slowing Is -and Has Been- in Progress
by Robert Brusca  January 21, 2022

The OECD amplitude-adjusted leading economic indicators (LEIs) show a slowing-to-mixed pattern when looked at from different angles. The OECD constructs these variables in such a way that index levels below 100 indicate slower than normal growth. In December, the United States, Greece, and China exhibit the property of heading for slower than normal growth. The U.S. exhibits that property for two months running. For China, the string is four months long. For Greece, it’s 20 months long.

Broad slowing indicated on 6-month intervals

January 2021 to July 2019, the U.S., the U.K., Japan, the EMU, Germany, France, and Italy experienced readings of the LEI index sub-100. These, of course, were Covid-afflicted months, but there also is weakness here that pre-dates Covid by about nine months.

Following a period of weakness, around April 2021, the LEI signal turned positive for most countries (exceptions were France, Greece, and Spain -Spain took one more month to move above 100). French weakness continued through October as the French LEI moved above 100 only in November 2021.

That is why when we look at the ratios of the current LEI to value of six months ago. Only France and Spain show levels that are higher. But because of the long strings of prior weakness, all countries except China show improvement when we compared six months ago (June 2021) to six months prior to that. This is the Covid acceleration that morphs into what now appears to be a deceleration stage.

Evaluation of the Table 1 values from late-1997 onward, the percentile standings of the current LEI values are above their medians on that timeline everywhere except for the U.S. and China; median values occur at 50 percentile rankings so at 44.5%, the U.S. is moderately below its median, but at 29.8% China is well below its median.

Looking beyond this LEI assessment of growth vs. the LEI index comparison to normalcy, there is also the issue of momentum. The month-to-month changes show momentum is dissipating. Over the last four months, the U.S., the U.K., Japan, the EMU, Germany, Italy, and Greece all show month-to-month weakening; China is weakening month-to-month for nine months in a row. And of course, now is when central banks are taking way the punch bowl of stimulus.

Table 1

Developing economy trends show weakening in December; 90% of the LEIs weaken compared to their November values. However, in terms of the level of the LEI index, only 6 of 14 show sub-par growth (LEI values below 100). But four countries: Indonesia, the Czech Republic, Hungary, and Slovakia show values below 100 that extend back uninterrupted to at least March 2020.

Turkey has an amazing 17-month streak of being above 100 but has gotten that at cost of high and entrenched inflation. Prospects for a severe setback there are high. India has a string of above 100 observations that is 15 months long. However, the prize for strength goes to Russia. It shows the strongest gains in the table over three months, six months and 12-months and has the highest index LEI reading in December to boot.

Russia also has the highest percentile standing for its LEI at 94.6% (on data back to 1996). Six developing nations in the table have percentile queue standings below their medians on that timeline including Brazil, China, Indonesia, the Czech Republic, Hungary, and Slovakia. Obviously, the BRIC countries have diverged and are in some very different circumstances.

Most developing nations are stronger over six months on balance and are also stronger than they were 12 months ago. There are six countries that show persisting weakness over six months and six that show weakness over three months. Looking at month-to-month changes in the LEI, there are several groupings that form around the clear trends. Chile, Brazil and China have month-to-month weakness that persists back to January or February of 2021. Mexico, Korea and India show month-to-month deterioration (or stasis) that is steady for at least five months in a row- seven months of stasis in the case of India.

Table 2

Global trends and issues
Globally the tilt is more to slowing than to speeding up; yet, inflation has been rising globally. Central banks along with fiscal policy had done a lot to try to preserve and sustain growth as Covid struck and as policies that were somewhere between naive and draconian were switched on to try to fight of the spread. Those policies did not work, they may have slowed the spread slightly, but did so at an incredible economic cost. Those costs are still multiplying as inflation flares because of all the transfer payments and monetary stimulus. Finally, central bankers are set to pull back for their monetary largesse – but not all of them.

It's true that the simple lack of new fiscal stimulus will create fiscal drag in 2022. But inflation is higher than expected and it now runs well beyond boundaries acceptable to price stability-seeking central banks. Supply chain issues exacerbate shortages and keep inflation pressures cooking as various labor market dropouts have the same effect on inflation in the wage market. With people out of the labor force taking retirement- some of it early- and reacting to closed schools and the need for child care, or simply leaving the work force out of health concerns because of Covid, the fact is that the labor market in the U.S. and elsewhere has tightened up with U.S. employment levels still below their pre-covid mark and yet with the unemployment rate already below 4%. Quit behavior, skills shortages, and all sorts of labor market signals tell us that labor markets are tight in the U.S. – at or beyond full employment. Between Covid’s impact on the labor market and supply chain shortages, we have reasons to see the inflation problems as real and lingering. Yet, some argue that raising rates will not solve supply chain issues. True. But is it preferable to do nothing and let inflation expectations mushroom?

Ongoing natural gas shortages, the onset of winter, and still-high oil prices provide an underlining of those risks as well. And while this creates a clear case and need for central bank action, economies already are slowing as the LEIs show. Is that a policy dilemma?

Christin Lagarde and the ECB say that a natural slowing is expected in 2022, some it caused by the same forces that raised inflation. But will that be enough? In the U.S., the Federal Reserve does not think so as it has shifted from its view of patience to a policy of planning various tightening steps in 2022. The U.S. and the ECB seem poised to run opposite policies early in 2022.

One thing is clear and that is 2022 will not be a repeat of 2021. Omicron has spread like wildfire and now it is starting to slow in those places where it was hottest and yet we do not have a good way to handicap its path in 2022. Some say that Omicron will be the last variant- but we have heard prognoses on the virus go wrong before (anytime one is made, in fact, it goes wrong!). So, we move into 2022 with a renewed sense of risk for growth as well as for markets and on the outlook for inflation.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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